Top Three steps to Starting An Investment Club
So, we’ve piqued your interest and you’d like to get the skinny on what it takes
to form and operate an investment club. There is indeed some set-up involved to
get your club off the ground, but if you follow these easy steps, your club will
be off and running in no time!
Step #1: Become a legal partnership
You already know that an investment club is a social outlet, a place to learn more
about investing in the stock market, and an opportunity to start investing your
money on a regular basis. It’s also a legal entity. Most clubs form as a general
partnership. Your club will need an Employee Identification Number (EIN). You can
obtain one by filling out
form SS-4 at the IRS web site.
Your club will
also need a partnership agreement. A partnership agreement spells
out the details of how the club will operate, from the official name of the club
to the date it was formed, how the club will keep track of its profits and losses,
and details of the club’s accounting. Check out a
sample partnership agreement.
It’s not required, but, in addition to the partnership agreement, some clubs decide
to establish bylaws. Bylaws are simply the working rules of the club. For example,
your club may decide to include in its bylaws the day of the month you’ll meet or
the maximum number of members the club will allow.
Step #2: Set up the club books
Now for the financial mumbo-jumbo (you knew this was coming). A club, as we’ve mentioned,
is a lot like a miniature mutual fund. Club members contribute money every so often,
and may eventually withdraw money once the club portfolio gets large enough. Club
accounting is serious business. How, for instance, do you determine how much a member's
share is worth, and how do you determine capital gains for each member? What happens
if someone pays late, or skips a deposit? And though the partnership itself does
not have to pay taxes, it does need to
file a partnership return with the IRS each year. Each year, also, the individual
partners must pay taxes on their share of the capital gains, dividends, and income
from the club. Yes, club accounting can be messy.
But don’t despair. Luckily, software products can do pretty much everything for
you. myICLUB.com can
print up-to-date reports of club holdings, member ownership, capital gains, graphs of
club performance, and can even generate required Federal and State Tax forms.
myICLUB.com also includes a private and secure club web site just for your club, with
club message boards, a calendar, and a place to share files.
For more information about these products, continue with this tutorial or
jump to the products and services page.
Step #3: Open an investment club account
In order to be a fully functioning investment club, you will need to engage the
services of a broker. When it comes to finding the right broker for your club, there
are lots of options. A full-service broker will guide your club and often provide
research on the stocks the club is studying as well as pay a visit and offer advice
at the occasional meeting. A discount broker won’t offer advice on what your club
should buy or sell and you’ll have to do your own research, but hey, that’s part
of the meat and potatoes of an investment club, anyway. Many clubs choose to go
the discount broker route, and with the ease and number of discount online brokers
available, conduct all of their transactions via the Internet.
As you’re mulling over these different options, you might consider asking one or
two of your club members to research the options and present them to the club. The
club can then make the decision by majority vote.